TEXAS REGIONAL BANCSHARES INC, 10-Q, 2000-10-31

TEXAS REGIONAL BANCSHARES INC
10-Q, 2000-10-31
STATE COMMERCIAL BANKS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 000-14517

TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

TEXAS 74-2294235
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

POST OFFICE BOX 5910
3900 NORTH 10TH STREET, 11TH FLOOR
MCALLEN, TEXAS 78502-5910
(Address of principal executive offices) (Zip Code)

(956) 631-5400
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

There were 14,624,262 shares of the registrant's Class A Voting Common Stock,
$1.00 par value, outstanding as of October 27, 2000.

<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets SEPTEMBER 30, DECEMBER 31,
(Dollars in Thousands, Except Share Data) 2000 1999
-------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and Due From Banks ............................ $ 55,703 $ 66,819
Time Deposits ...................................... 3,810 5,077
-------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ................... 59,513 71,896
Securities Available for Sale, at Fair Value ....... 595,916 525,938
Securities Held to Maturity, at Amortized Cost
(Fair Value of $1,881 in 2000 and $8,071 in 1999). 1,846 8,010
Loans, Net of Unearned Discount of $3,887 in 2000
and $5,154 in 1999 ............................... 1,519,963 1,374,759
Less: Allowance for Loan Losses .................... (18,602) (16,711)
-------------------------------------------------------------------------------------
Net Loans ......................................... 1,501,361 1,358,048
Premises and Equipment ............................. 76,885 75,583
Accrued Interest Receivable ........................ 23,686 19,869
Other Real Estate .................................. 4,482 5,268
Goodwill and Identifiable Intangibles .............. 41,497 44,796
Other Assets ....................................... 11,819 11,282
-------------------------------------------------------------------------------------
Total Assets ...................................... $ 2,317,005 $ 2,120,690
-------------------------------------------------------------------------------------
Liabilities
Deposits
Demand ............................................ $ 289,687 $ 285,866
Savings ........................................... 115,884 118,758
Money Market Checking and Savings ................. 477,069 377,458
Time Deposits ..................................... 1,181,521 1,103,264
-------------------------------------------------------------------------------------
Total Deposits ................................... 2,064,161 1,885,346
Other Borrowed Money ............................... 26,324 34,608
Accounts Payable and Accrued Liabilities ........... 15,069 12,548
-------------------------------------------------------------------------------------
Total Liabilities ................................. 2,105,554 1,932,502
-------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000
Shares Authorized; None Issued and Outstanding ... -- --
Common Stock - Class A; $1.00 Par Value,
50,000,000 Shares Authorized;
Issued and Outstanding 14,623,137 Shares in 2000
and 14,524,739 Shares In 1999 .................... 14,623 14,525
Paid-In Capital ................................... 90,131 88,834
Retained Earnings ................................. 117,960 98,277
Accumulated Other Comprehensive Loss .............. (11,263) (13,448)
-------------------------------------------------------------------------------------
Total Shareholders' Equity ....................... 211,451 188,188
-------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........ $ 2,317,005 $ 2,120,690
-------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

Page 2
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries THREE MONTHS NINE MONTHS
Consolidated Statements of Income and Comprehensive Income ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees ........................................ $ 37,569 $ 28,366 $ 106,961 $ 81,206
Securities
Taxable .................................................... 8,053 6,753 23,780 19,829
Tax-Exempt ................................................. 602 515 1,771 1,511
Time Deposits ................................................ 62 4 193 13
Federal Funds Sold ........................................... 50 124 292 787
------------------------------------------------------------------------------------------------------------------------
Total Interest Income ...................................... 46,336 35,762 132,997 103,346
------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits ..................................................... 21,626 15,127 60,381 44,150
Other Borrowed Money ......................................... 883 293 1,758 494
------------------------------------------------------------------------------------------------------------------------
Total Interest Expense ..................................... 22,509 15,420 62,139 44,644
------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses ............ 23,827 20,342 70,858 58,702
Provision for Loan Losses ....................................... 2,558 1,600 7,052 4,422
------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses .......... 21,269 18,742 63,806 54,280
------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts .......................... 3,008 2,469 8,665 6,851
Other Service Charges ........................................ 618 519 2,223 1,838
Trust Service Fees ........................................... 592 480 1,656 1,456
Net Realized Gains on Sales of
Securities Available for Sale .............................. -- 2 -- 1
Data Processing Service Fees ................................. 659 540 1,930 1,553
Other Operating Income ....................................... 385 275 1,399 939
------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income ................................... 5,262 4,285 15,873 12,638
------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits ............................... 6,591 5,433 19,399 15,951
Net Occupancy Expense ........................................ 1,017 848 3,018 2,841
Equipment Expense ............................................ 1,618 1,337 4,595 3,788
Other Real Estate (Income) Expense, Net ...................... (9) 83 473 279
Amortization of Goodwill and Identifiable Intangibles ........ 1,108 680 3,361 2,039
Other Noninterest Expense .................................... 3,007 2,267 9,310 7,208
------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense .................................. 13,332 10,648 40,156 32,106
------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense ................................ 13,199 12,379 39,523 34,812
Income Tax Expense .............................................. 4,281 4,365 13,713 12,281
------------------------------------------------------------------------------------------------------------------------
Net Income ...................................................... 8,918 8,014 25,810 22,531
Other Comprehensive Income (Loss), Net of Tax
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains (Losses) Arising During Period .... 5,128 (2,548) 2,185 (10,696)
Less: Reclassification Adjustment for Gains
Included in Net Income ................................... -- 1 -- 1
------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) ................. 5,128 (2,549) 2,185 (10,697)
------------------------------------------------------------------------------------------------------------------------
Comprehensive Income ............................................ $ 14,046 $ 5,465 $ 27,995 $ 11,834
------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic ........................................................ $ 0.61 $ 0.56 $ 1.77 $ 1.56
Diluted ...................................................... 0.61 0.55 1.76 1.54
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

Page 3
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
Texas Regional Bancshares, Inc. and Subsidiaries OTHER
Consolidated Statements of Changes COMMON COMPREHENSIVE TOTAL
In Shareholders' Equity STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS'
(Dollars in Thousands) CLASS A CAPITAL EARNINGS (LOSS) EQUITY
---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999
Balance, Beginning of Period ..................... $ 14,405 $ 87,396 $ 74,864 $ 609 $ 177,274
Net Income ....................................... -- -- 22,531 -- 22,531
Unrealized Loss on Securities,
Net of Tax and Reclassification Adjustment ..... -- -- -- (10,697) (10,697)
---------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income ..................... -- -- 22,531 (10,697) 11,834
---------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 1,000 Shares of
Class A Common Stock .......................... 1 10 -- -- 11
Tax Effect of Nonqualified Stock Options
Exercised ..................................... -- 5 -- -- 5
Class A Common Stock Cash Dividends .............. -- -- (5,404) -- (5,404)
---------------------------------------------------------------------------------------------------------------------------
Balance, End of Period ........................... $ 14,406 $ 87,411 $ 91,991 $ (10,088) $ 183,720
---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000
Balance, Beginning of Period ..................... $ 14,525 $ 88,834 $ 98,277 $ (13,448) $ 188,188
Net Income ....................................... -- -- 25,810 -- 25,810
Unrealized Gains on Securities,
Net of Tax and Reclassification Adjustment ..... -- -- -- 2,185 2,185
---------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income ..................... -- -- 25,810 2,185 27,995
---------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 98,398 Shares of
Class A Common Stock ........................... 98 705 -- -- 803
Tax Effect of Nonqualified Stock Options
Exercised ..................................... -- 592 -- -- 592
Class A Common Stock Cash Dividends .............. -- -- (6,127) -- (6,127)
---------------------------------------------------------------------------------------------------------------------------
Balance, End of Period ........................... $ 14,623 $ 90,131 $ 117,960 $ (11,263) $ 211,451
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

Page 4
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
Texas Regional Bancshares, Inc. and Subsidiaries ENDED SEPTEMBER 30,
Consolidated Statements of Cash Flows ------------------------
(Dollars in Thousands) 2000 1999
---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income .............................................................. $ 25,810 $ 22,531
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net ...................... 7,700 6,234
Provision for Loan Losses .......................................... 7,052 4,422
Provision for Estimated Losses on Other Real Estate and Other Assets 425 16
Gain on Sale of Securities Available for Sale ...................... -- (1)
(Gain) Loss on Sale of Other Assets ................................ (28) 37
Gain on Sale of Other Real Estate .................................. (121) (152)
Gain on Sale of Premises and Equipment ............................. (174) (39)
(Increase) Decrease in Deferred Income Tax Asset ................... (1,948) 3,155
Decrease in Deferred Income Tax Liability .......................... -- (4,487)
Increase in Accrued Interest Receivable and Other Assets ........... (4,052) (3,360)
Increase in Accounts Payable and Accrued Liabilities ............... 3,075 1,276
---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities .................................. 37,739 29,632
---------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale .................... -- 27,041
Proceeds from Maturing Securities Available for Sale .................... 15,048 111,055
Purchases of Securities Available for Sale .............................. (81,738) (164,986)
Proceeds from Maturing Securities Held to Maturity ...................... 6,140 6,300
Proceeds from Sale of Loans ............................................. 1,347 1,134
Purchases of Loans ...................................................... (2,958) (2,958)
Loan Originations and Advances, Net ..................................... (150,179) (142,605)
Recoveries of Charged-Off Loans ......................................... 336 497
Proceeds from Sale of Premises and Equipment ............................ 184 241
Purchases of Premises and Equipment ..................................... (5,436) (4,118)
Proceeds from Sale of Other Real Estate ................................. 897 797
Proceeds from Sale of Other Assets ...................................... 1,016 449
---------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities ...................................... (215,343) (167,153)
---------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Savings, Money
Market Checking and Savings Accounts .................................. 100,558 (10,666)
Net Increase in Time Deposits ........................................... 78,257 113,879
Net Increase (Decrease) in Other Borrowed Money ......................... (8,284) 38,755
Cash Dividends Paid on Class A Common Stock ............................. (6,113) (5,404)
Proceeds from the Sale of Common Stock .................................. 803 11
---------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities .................................. 165,221 136,575
---------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents ...................................... (12,383) (946)
Cash and Cash Equivalents at Beginning of Period ........................... 71,896 90,827
---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period ................................. $ 59,513 $ 89,881
---------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>

Page 5
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries NINE MONTHS
Consolidated Statements of Cash Flows ENDED SEPTEMBER 30,
(Dollars in Thousands) 2000 1999
---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid ........................................................... $ 60,639 $ 44,514
Income Taxes Paid ....................................................... 13,869 14,053
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 2,064 4,348
Financing Provided For Sales of Other Real Estate ....................... 975 2,379
Net Increase in Dividends Payable ....................................... 14 --
---------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 6
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, the
consolidated financial statements include all adjustments that, in the opinion
of management, are necessary for a fair presentation. All such adjustments were
of a normal and recurring nature. The results of operations and cash flows for
the nine months ended September 30, 2000 and 1999 should not be considered
indicative of the results to be expected for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Texas Regional
Bancshares, Inc. and Subsidiaries (the "Company") Annual Report on Form 10-K for
the year ended December 31, 1999.

The consolidated financial statements include the accounts of Texas
Regional Bancshares, Inc. (the "Parent") and its wholly-owned subsidiaries,
Texas Regional Delaware, Inc. and Texas State Bank (the "Bank"). The Company
eliminates all significant intercompany transactions and balances in
consolidation. The Company accounts for its investments in subsidiaries on the
equity method in the Parent's financial statements.

The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998 and subsequently amended by Financial Accounting Standards
Board's Statement No. 138, "Accounting for Certain Derivatives Instruments and
Certain Hedging Activities". Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. The Financial Accounting
Standards Board's Statement No. 137 ("Statement 137"), "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133", deferred the effective date of Statement 133 to fiscal
years beginning after June 15, 2000. The Company will adopt Statement 133 on
January 1, 2001. The Company currently does not hold any derivative instruments
and does not hedge or plan to hedge in the immediate future. Although the
Company is still evaluating its products for embedded derivatives, management
does not believe implementation of Statement 133 will have a significant impact
on its future consolidated financial statements.

NOTE 2: RECLASSIFICATION

Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications have
no effect on previously reported net income.

NOTE 3: IMPAIRED LOANS

A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company identifies loans to be
reported as impaired when such loans are on nonaccrual status or are considered
troubled debt restructurings. A restructured loan is generally a loan that is
accruing interest, but on which concessions in terms has been made as a result
of deterioration in the borrower's financial condition. The balance of impaired
loans was $14.1 million at September 30, 2000 for which there was a related
allowance for loan losses of $2.6 million. At September 30, 2000, the Company
had $84,000 in impaired loans for which there was no related allowance for loan
losses. The average recorded investment in impaired loans during the nine months
ended September 30, 2000 was $13.1 million. Interest income on impaired loans of
$468,000 was recognized during the nine months ended September 30, 2000,
including $182,000 recognized for cash payments received on nonaccrual loans.

NOTE 4: COMMON STOCK

On September 12, 2000, the Board of Directors approved a cash dividend of
$0.14 per share for shareholders of record on October 2, 2000 and payable on
October 13, 2000.

Page 7
<PAGE>
NOTE 5: EARNINGS PER COMMON SHARE COMPUTATIONS

The table below presents a reconciliation of basic and diluted earnings
per share computations.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------------------------
(Dollars in Thousands, Except Share Data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income Available to Common Shareholders ........ $ 8,918 $ 8,014 $ 25,810 $ 22,531
--------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation ................... 14,619,762 14,405,256 14,580,064 14,405,104
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities ............. 66,542 216,863 93,624 216,020
--------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations .... 14,686,304 14,622,119 14,673,688 14,621,124
--------------------------------------------------------------------------------------------------------------------
Basic EPS .......................................... $ 0.61 $ 0.56 $ 1.77 $ 1.56
Diluted EPS ........................................ 0.61 0.55 1.76 1.54
--------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS. This Management's Discussion and Analysis
includes forward-looking statements. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry significantly increasing; changes
in the interest rate environment reducing margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions; volatility of rate sensitive deposits;
operational risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets. Because of these uncertainties, actual future results may be
materially different from the results indicated by these forward-looking
statements. In addition, the Company's past results do not necessarily indicate
its future results.

Management's discussion and analysis of the Company's consolidated
financial condition and results of operations at the dates and for the periods
indicated follows. This discussion should be read in conjunction with the
Company's consolidated financial statements and the accompanying notes.

GENERAL

Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a
Texas business corporation incorporated in 1983 and headquartered in McAllen,
Texas. The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 and as such is registered with the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). Texas
Regional Delaware, Inc., incorporated under the laws of Delaware as a
wholly-owned second tier bank holding company subsidiary, owns Texas State Bank
(the "Bank"), the Company's primary operating subsidiary. The Bank has two
wholly-owned subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to
provide full service broker-dealer services and (ii) TSB Properties, Inc.,
incorporated in 1998 to receive and liquidate foreclosed assets.

By authority of the Board of Directors of the Company, Texas Regional in
May 2000 filed a Declaration Electing to be a Financial Holding Company with the
Federal Reserve Bank of Dallas. The Declaration became effective in June 2000.

Texas State Bank operates twenty-six banking locations in the Rio Grande
Valley including four banking locations each in McAllen (including its main
office), Brownsville and Harlingen, three banking locations in Mission, two
banking locations in Weslaco, and one banking location each in Edinburg,
Hidalgo, La Feria, Mercedes, Palm Valley, Penitas, Raymondville, Rio Grande City
and Roma. At September 30, 2000, Texas Regional had consolidated total assets of
$2.3 billion, loans (net of unearned discount) of $1.5 billion, deposits of $2.1
billion, and shareholders' equity of $211.5 million.

Page 8
<PAGE>
On October 1, 1999, the Company completed the acquisition of Harlingen
Bancshares, Inc. and its wholly-owned subsidiary, Harlingen National Bank. The
acquisition included its main office and three banking locations in Harlingen,
Cameron County, Texas; one banking location in La Feria, Cameron County, Texas;
and one banking location in Mercedes, Hidalgo County, Texas, with assets of
$204.2 million, loans of $110.7 million, deposits of $183.6 million, and equity
of $19.9 million. The shareholders of Harlingen Bancshares, Inc. received
aggregate consideration of $34.0 million, including $1.0 million deposited into
escrow pending the outcome of certain contingencies. Simultaneously, the
shareholders of Harlingen Bancshares, Inc. or their affiliates purchased certain
assets of Harlingen Bancshares, Inc. for book value totaling $2.4 million. Texas
Regional also agreed to pay $1.0 million over a term of ten years in
consideration of a covenant not to compete from certain principals of Harlingen
Bancshares, Inc. Texas Regional accounted for the acquisition under the purchase
method of accounting; therefore, the results of operations are included in the
consolidated financial statements from the date of acquisition, October 1, 1999.

FINANCIAL CONDITION

CASH AND CASH EQUIVALENTS

The Company, through its main office and branches, offers a broad range of
commercial banking services to individuals and businesses in its service area.
It also acts as a correspondent to a number of banks in its service area,
providing check clearing, wire transfer, federal funds transactions, loan
participations and other correspondent services. The amount of cash and cash
equivalents held on any day is significantly influenced by temporary changes in
cash items in process of collection. The Company had cash and cash equivalents
totaling $59.5 million at September 30, 2000. Comparatively, the Company had
$71.9 million in cash and cash equivalents at December 31, 1999, a decrease of
$12.4 million or 17.2%.

SECURITIES

Securities consist of U.S. Treasury, federal agency, mortgage-backed and
state, county and municipal securities. The Bank classifies debt and equity
securities into one of three categories: held to maturity, trading or available
for sale. At each reporting date, management reassesses the appropriateness of
the classification. Investments in debt securities are classified as held to
maturity and measured at amortized cost in the consolidated balance sheet only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the consolidated balance sheets' with unrealized holding gains and
losses included in earnings. Securities not classified as either held to
maturity or trading are classified as available for sale and measured at fair
value in the consolidated balance sheets' with unrealized holding gains and
losses reported in a separate component of shareholders' equity, net of
applicable income taxes until realized.

At September 30, 2000 and December 31, 1999, no securities were classified
as Trading. The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.

Page 9
<PAGE>
The following table presents the amortized cost and estimated fair value
of securities at September 30, 2000 and December 31, 1999 (dollars in
thousands):

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
September 30, 2000 (Unaudited)
U.S. Treasury .................................... $ 5,272 $ -- $ -- $ 5,272
U.S. Government Agency ........................... 425,874 312 (12,640) 413,546
Mortgage-Backed .................................. 123,824 3 (3,717) 120,110
States and Political Subdivisions ................ 49,866 183 (1,602) 48,447
Other ............................................ 8,541 -- -- 8,541
-----------------------------------------------------------------------------------------------------------------------
Total ......................................... $613,377 $ 498 $(17,959) $595,916
-----------------------------------------------------------------------------------------------------------------------
December 31, 1999
U.S. Treasury .................................... $ 2,999 $ 5 $ -- $ 3,004
U.S. Government Agency ........................... 359,558 18 (14,975) 344,601
Mortgage-Backed .................................. 131,699 5 (4,073) 127,631
States and Political Subdivisions ................ 48,198 164 (1,992) 46,370
Other ............................................ 4,332 -- -- 4,332
-----------------------------------------------------------------------------------------------------------------------
Total ......................................... $546,786 $ 192 $(21,040) $525,938
-----------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
September 30, 2000 (Unaudited)
States and Political Subdivisions ................ $ 1,846 $ 35 $ -- $ 1,881
-----------------------------------------------------------------------------------------------------------------------
Total ......................................... $ 1,846 $ 35 $ -- $ 1,881
-----------------------------------------------------------------------------------------------------------------------
December 31, 1999
U.S. Treasury .................................... $ 5,001 $ 17 $ -- $ 5,018
States and Political Subdivisions ................ 3,009 50 (6) 3,053
-----------------------------------------------------------------------------------------------------------------------
Total ......................................... $ 8,010 $ 67 $ (6) $ 8,071
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

Net unrealized holding losses, net of related tax effect, of $11.3 million
and $13.4 million at September 30, 2000 and December 31, 1999, respectively, on
securities available for sale are reported as a separate component of
shareholders' equity and as other comprehensive income.

Securities with carrying values of $583.5 million at September 30, 2000
and $516.8 million at December 31, 1999 were pledged to secure public funds,
trust assets on deposit and for other purposes required or permitted by law.

LOANS

The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and risk products. Diversification of risk
within each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continually refines the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.

The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the

Page 10
<PAGE>
commercial loan portfolio includes accounts receivable and inventory, marketable
securities, equipment and agricultural products. Autos, deeds of trust, life
insurance and marketable securities are accepted as collateral for the
installment loan portfolio.

Management of the Company believes that the Company has benefited from
increased loan demand due to passage of the North American Free Trade Agreement
("NAFTA") and the strong population growth in the Rio Grande Valley. More
recently, the continued devaluation of the Mexican peso relative to the U.S.
dollar has reduced retail sales to residents of Mexico. However, the effects of
NAFTA and the devaluation have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.

The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. The
Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at September 30, 2000 of $8.9 million represented 0.6% of
total loans. See "Nonperforming Assets" for additional information on
cross-border credits.

Total loans of $1.5 billion at September 30, 2000 increased $145.2 million
or 10.6% compared to December 31, 1999 levels of $1.4 billion. The increase in
total loans for the nine months ended September 30, 2000 reflects growth in all
loan categories except Commercial Tax-Exempt, Agricultural and Consumer loans
and is representative in part to the vitality of the Rio Grande Valley economy.
The following table presents the composition of the loan portfolio (dollars in
thousands):

SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------------------------------------------------------------
(Unaudited)
Commercial ............................. $ 435,414 $ 391,855
Commercial Tax-Exempt .................. 13,358 22,160
---------------------------------------------------------------------------
Total Commercial Loans .............. 448,772 414,015
---------------------------------------------------------------------------
Agricultural ........................... 52,632 59,437
---------------------------------------------------------------------------
Real Estate
Construction ........................ 153,759 101,376
Commercial Mortgage ................. 517,446 456,507
Agricultural Mortgage ............... 42,981 38,256
1-4 Family Mortgage ................. 173,842 160,786
---------------------------------------------------------------------------
Total Real Estate ................. 888,028 756,925
---------------------------------------------------------------------------
Consumer ............................... 130,531 144,382
---------------------------------------------------------------------------
Total Loans ......................... $1,519,963 $1,374,759
---------------------------------------------------------------------------

The Company's policy on maturity extensions and rollovers is based on
management's assessment of individual loans. Approvals for the extension or
renewal of loans without reduction of principal for more than one twelve-month
period are generally avoided, unless the loans are fully secured and properly
margined by cash or marketable securities, or are revolving lines subject to
annual analysis and renewal.

NONPERFORMING ASSETS

The Company has several procedures in place to assist in maintaining the
overall quality of its loan portfolio. The Bank has established underwriting
guidelines to be followed by its officers and monitors its delinquency levels
for any negative or adverse trends.

Page 11
<PAGE>
Nonperforming assets consist of loans reported as impaired because such
loans are on nonaccrual status or are considered troubled debt restructurings,
and other assets, primarily real estate, acquired in partial or full
satisfaction of loan obligations. The Company's policy generally is to place a
loan on nonaccrual status when payment of principal or interest is contractually
past due 90 days, or earlier when concern exists as to the ultimate collection
of principal and interest. At the time a loan is placed on nonaccrual status,
interest previously accrued but uncollected is reversed and charged against
current income unless the collateral provides more than adequate margin to
ensure collection of that interest. A restructured loan is generally a loan that
is accruing interest, but on which concessions in terms have been made as a
result of deterioration in the borrower's financial condition. The Company's
classification of nonperforming loans includes those loans for which management
believes collection is doubtful. Management is not aware of any specific
borrower relationships that are not reported as nonperforming where management
has serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms which would cause nonperforming assets to increase
materially.

Nonperforming assets of $19.1 million at September 30, 2000 increased $4.8
million, 33.6% compared to December 31, 1999 levels of $14.3 million.
Nonperforming loans of $14.1 million at September 30, 2000 increased $5.8
million or 69.5% compared to $8.3 million at December 31, 1999. The increase in
nonperforming loans resulted from the addition of $5.2 million in restructured
loans during 2000. Nonaccrual loans of $8.9 million at September 30, 2000
increased $610,000 or 7.3% compared to $8.3 million at December 31, 1999.
Cross-border nonaccrual loans at September 30, 2000 of $4.0 million decreased by
$266,000 or 6.2% from $4.3 million at December 31, 1999. The decrease in
foreclosed assets during 2000 was primarily attributable to the sale of the
larger foreclosed assets. Management actively seeks buyers for all Other Real
Estate. See "Noninterest Expense" below.

Loans which are contractually past due 90 days or more, which are both
well secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more at September 30, 2000 and December 31,
1999 that are not classified as nonaccrual totaled $2.1 million and $2.7
million, respectively. The decrease in accruing loans past due 90 days or more
at September 30, 2000 as compared to the year ended December 31, 1999 was
primarily a result of a 50% decrease in the number of loans in this category.
The ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due
as a percent of Total Loans and Foreclosed Assets at September 30, 2000
increased to 1.39% from 1.23% at December 31, 1999 due to the loans that were
renegotiated during second quarter 2000.

An analysis of the components of nonperforming assets follows (dollars in
thousands):

------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------------------------------------------------------------------
(Unaudited)
Nonaccrual Loans ................................. $ 8,951 $ 8,341
Restructured Loans ............................... 5,190 --
------------------------------------------------------------------------------
Nonperforming Loans ........................... 14,141 8,341
Foreclosed and Other Assets ...................... 4,958 5,958
------------------------------------------------------------------------------
Total Nonperforming Assets .................... 19,099 14,299
Accruing Loans 90 Days or More Past Due .......... 2,135 2,697
------------------------------------------------------------------------------
Nonperforming Loans as a % of Total Loans ........ 0.93% 0.61%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets ............................. 1.25 1.04
Nonperforming Assets as a % of Total Assets ...... 0.82 0.67
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans and
Foreclosed Assets ............................. 1.39 1.23
------------------------------------------------------------------------------

Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
September 30, 2000, all such loans had been identified and included in the
nonaccrual, renegotiated or 90 days or more past due loan totals reflected in
the table above. Management continues to emphasize maintaining a low level of
nonperforming assets and returning nonperforming assets to an earning status.

Page 12
<PAGE>
ALLOWANCE FOR LOAN LOSSES

Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and not specifically reserved while additional
amounts are added for individual loans considered to have specific loss
potential. Loans identified as losses are charged-off. In addition, the loan
review committee of the Bank reviews the assessments of management in
determining the adequacy of the Bank's allowance for loan losses. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. While management uses available information to
recognize losses on loans, there can be no assurance that future additions to
the allowance will not be necessary.

The allowance for loan losses at September 30, 2000 totaled $18.6 million,
representing a net increase of $1.9 million or 11.3% compared to $16.7 million
at December 31, 1999. The increase is primarily due to an increase in loans by
10.6% since December 31, 1999. Management believes that the allowance for loan
losses at September 30, 2000 adequately reflects the risks in the loan
portfolio. Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.

The following table summarizes the activity in the allowance for loan
losses (dollars in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at Beginning of Period ............... $18,239 $14,261 $16,711 $13,236
Provision for Loan Losses .................... 2,558 1,600 7,052 4,422
Charge-Offs
Commercial ................................ 1,889 631 3,866 1,918
Agricultural .............................. 2 -- 16 5
Real Estate ............................... 35 21 214 69
Consumer .................................. 384 445 1,401 1,084
-------------------------------------------------------------------------------------------------
Total Charge-Offs ....................... 2,310 1,097 5,497 3,076
-------------------------------------------------------------------------------------------------
Recoveries
Commercial ................................ 27 183 64 246
Agricultural .............................. 3 -- 29 5
Real Estate ............................... 1 18 10 30
Consumer .................................. 84 114 233 216
-------------------------------------------------------------------------------------------------
Total Recoveries ........................ 115 315 336 497
-------------------------------------------------------------------------------------------------
Net Charge-Offs .............................. 2,195 782 5,161 2,579
-------------------------------------------------------------------------------------------------
Balance at End of Period ..................... $18,602 $15,079 $18,602 $15,079
-------------------------------------------------------------------------------------------------
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount 1.22% 1.23% 1.22% 1.23%
Ratio of Allowance for Loan Losses to
Nonperforming Loans ....................... 131.55 197.78 131.55 197.78
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount 0.58 0.26 0.47 0.30
-------------------------------------------------------------------------------------------------
</TABLE>

Page 13
<PAGE>
PREMISES AND EQUIPMENT, NET

Premises and equipment of $76.9 million at September 30, 2000 remained
comparable to December 31, 1999 levels of $75.6 million, increasing by $1.3
million or 1.7%.

GOODWILL AND IDENTIFIABLE INTANGIBLES

Intangibles of $41.5 million at September 30, 2000 decreased $3.3 million
or 7.4% compared to $44.8 million at December 31, 1999. The net decrease for the
nine months ended September 30, 2000 is attributable to amortization of existing
intangibles.

DEPOSITS

Total deposits of $2.1 billion at September 30, 2000 increased $178.8
million or 9.5% compared to December 31, 1999 levels of $1.9 billion. The
increase in total deposits for the nine months ended September 30, 2000 is
primarily attributable to growth in the volume of business conducted by the
Company and the vitality of the Rio Grande Valley economy. The following table
presents the composition of total deposits (dollars in thousands):

SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------------------------------------------------------
(Unaudited)
Demand Deposits
Commercial and Individual ....... $ 283,635 $ 277,729
Public Funds .................... 6,052 8,137
------------------------------------------------------------------
Total Demand Deposits ......... 289,687 285,866
------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual ..... 115,545 118,512
Public Funds .................. 339 246
Money Market Checking and Savings
Commercial and Individual ..... 336,642 298,667
Public Funds .................. 140,427 78,791
Time Deposits
Commercial and Individual ..... 871,107 800,935
Public Funds .................. 310,414 302,329
------------------------------------------------------------------
Total Interest-Bearing Deposits 1,774,474 1,599,480
------------------------------------------------------------------
Total Deposits ............. $2,064,161 $1,885,346
------------------------------------------------------------------

OTHER BORROWED MONEY

The components of other borrowed money are as follows (dollars in
thousands):

SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------
(Unaudited)
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements $21,324 $34,608
Federal Home Loan Bank Advances ......... 5,000 --
--------------------------------------------------------------------------
Total Borrowed Money .................. $26,324 $34,608
--------------------------------------------------------------------------

At September 30, 2000, the Company had lines of credit totaling $30.0
million with correspondent banks for short-term liquidity needs.

Page 14
<PAGE>
SHAREHOLDERS' EQUITY

Shareholders' equity increased by $23.3 million, or 12.4% during the nine
months ended September 30, 2000 primarily due to comprehensive income of $28.0
million less cash dividends of $6.1 million. Comprehensive income for the period
included net income of $25.8 million and unrealized gains on securities
available for sale, net of tax, of $2.2 million.

Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. The table below
reflects various measures of regulatory capital (dollars in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
----------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale $ 222,714 -- $ 201,636 --
Less Goodwill and Other Deductions ................ (41,497) -- (44,796) --
----------------------------------------------------------------------------------------------------------------------
Total Tier I Capital .............................. 181,217 -- 156,840 --
Total Tier II Capital ............................. 18,602 -- 16,711 --
----------------------------------------------------------------------------------------------------------------------
Total Qualifying Capital .......................... $ 199,819 -- $ 173,551 --
----------------------------------------------------------------------------------------------------------------------
Total Risk-Based Capital .......................... $ 199,819 12.26% $ 173,551 11.94%
Total Risk-Based Capital Minimum .................. 130,433 8.00 116,313 8.00
----------------------------------------------------------------------------------------------------------------------
Tier I Risk-Based Capital ......................... 181,217 11.11 156,840 10.79
Tier I Risk-Based Capital Minimum ................. 65,216 4.00 58,157 4.00
----------------------------------------------------------------------------------------------------------------------
Tier I Leverage Capital ........................... 181,217 8.05 156,840 7.58
Tier I Leverage Capital Minimum ................... 90,100 4.00 82,777 4.00
----------------------------------------------------------------------------------------------------------------------
</TABLE>

At September 30, 2000, the Company and the Bank met the criteria for
classification as a "well-capitalized" institution under the prompt corrective
action rules promulgated under the Federal Deposit Insurance Act. Designation as
a well-capitalized institution under these regulations does not constitute a
recommendation or endorsement of the Company or the Bank by Federal bank
regulators.

RESULTS OF OPERATIONS

NET INCOME

Net income available for common shareholders was $8.9 million and $8.0
million and earnings per diluted common share were $0.61 and $0.55 for the three
months ended September 30, 2000 and 1999, respectively. Net income increased due
to sustained loan growth. Return on assets averaged 1.56% and 1.70% while return
on shareholders' equity averaged 17.27% and 17.39% for the three months ended
September 30, 2000 and 1999, respectively.

For the nine months ended September 30, 2000, net income available for
common shareholders was $25.8 million compared to $22.5 million for the same
period in 1999, representing an increase of $3.3 million or 14.6%. Earnings per
diluted common share were $1.76 and $1.54, respectively, for the nine months
ended September 30, 2000 and 1999. Return on assets averaged 1.55% and return on
shareholders' equity averaged 17.49% for the nine months ended September 30,
2000 compared to 1.65% and 16.54%, respectively, for the same period in 1999.

INTEREST INCOME

Total interest income for the three months ended September 30, 2000 was
$46.3 million, an increase of $10.6 million or 29.6% from the three months ended
September 30, 1999. For the nine months ended September 30, 2000, interest
income was $133.0 million, a $29.7 million or 28.7% increase from the same
period in 1999. This increase in interest income is due to a $371.1 million or
21.9% increase in average earning assets to $2.1 billion for the three months
ended September 30, 2000 from the same period last year. Average earning assets
increased by $358.8 million or 21.6% to $2.0 billion for the nine months ended
September 30, 2000.

Page 15
<PAGE>
Interest income on loans increased $9.2 million or 32.4% to $37.6 million
for the three months ended September 30, 2000. A $297.0 million or 24.6%
increase in average loans outstanding over the same period in 1999 propelled
this increase. Interest income on securities increased to $8.7 million, a $1.4
million or 19.1% increase from the prior comparable period. This increase was
attributable to a $76.9 million increase in average securities, up 16.0% when
compared to the three months ended September 30, 1999.

For the nine months ended September 30, 2000, interest income on loans
increased 31.7% to $107.0 million, up from $81.2 million for the same period in
1999. Interest income on securities increased to $25.6 million, an increase of
$4.2 million or 19.7% from the prior period. These gains were principally
related to an increase of average earning assets to $2.0 billion for the nine
months ended September 30, 2000, an increase of 21.6% from the same period last
year.

INTEREST EXPENSE

Interest expense on deposits and other borrowings increased to $22.5
million for the three months ended September 30, 2000 compared to $15.4 million
for the same period in 1999. For the nine months ended September 30, 2000,
interest expense of deposits and other borrowings was $62.1 million compared to
$44.6 million for the same period in 1999. The increase in interest expense was
attributable to a $335.5 million and $329.9 million increase in average
interest-bearing liabilities from the three and nine month comparable period,
respectively.

NET INTEREST INCOME

Net interest income, reported on a tax equivalent basis, was $24.3 million
for the three months ended September 30, 2000, compared with $20.7 million for
the same period in 1999, an increase of $3.6 million or 17.2%. For the nine
months ended September 30, 1999, net interest income increased $12.3 million or
20.6% to $72.1 million from $59.8 million for the same period in 1999. The
increase in net interest income during the three and nine months ended September
30, 2000 was largely due to growth in average interest-earning assets, primarily
loans.

The net interest margin was 4.67% for the three months ended September 30,
2000, compared with 4.84% for the same period in 1999. This decrease was
attributable to an eighty basis point increase in the cost of average
interest-bearing liabilities to 5.09%, up from 4.29% for the same period last
year. This was partially offset by an increase in the yield on average
interest-earning assets by fifty-five basis points to 9.00% for the three months
ended September 30, 2000. The net interest margin was 4.77% for the nine months
ended September 30, 2000, down from 4.82% for the same period in 1999. This
decrease was attributable to a fifty-three basis point increase in the cost on
average interest-bearing liabilities to 4.82%, up from 4.29% for the same period
last year. The yield of interest-earning assets also increased by forty-eight
basis points to 8.89% for the nine months ended September 30, 2000.

The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change". It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change". The following tables present for
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, reported on a tax-equivalent
basis, and the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Average balances are derived from average
daily balances and the yields and costs are established by dividing income or
expense by the average balance of the asset or liability. Income and yield on
interest-earning assets include amounts to convert tax-exempt income to a
taxable-equivalent basis, assuming a 35% effective tax rate for 2000 and 1999
(dollars in thousands):

Page 16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE(2) BALANCE INTEREST RATE(2)
-------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ....................... $ 502,417 $ 12,463 9.87% $ 421,228 $ 9,523 8.97%
Real Estate ...................... 869,516 21,640 9.90 655,815 15,567 9.42
Consumer ......................... 131,916 3,608 10.88 129,769 3,398 10.39
-------------------------------------------------------------------------------------------------------------------------------
Total Loans .................... 1,503,849 37,711 9.98 1,206,812 28,488 9.37
-------------------------------------------------------------------------------------------------------------------------------
Securities (3)
Taxable .......................... 507,745 8,053 6.31 438,350 6,753 6.11
Tax-Exempt ....................... 49,830 916 7.31 42,337 769 7.21
-------------------------------------------------------------------------------------------------------------------------------
Total Securities ............... 557,575 8,969 6.40 480,687 7,522 6.21
-------------------------------------------------------------------------------------------------------------------------------
Time Deposits ...................... 4,117 62 5.99 280 4 5.67
Federal Funds Sold ................. 3,024 50 6.58 9,728 124 5.06
-------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets .. 2,068,565 46,792 9.00% 1,697,507 36,138 8.45%
-------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks .............. 59,203 -- -- 48,971 -- --
Premises and Equipment, Net .......... 77,186 -- -- 69,601 -- --
Other Assets ......................... 85,267 -- -- 68,556 -- --
Allowance for Loan Losses ............ (19,165) -- -- (14,851) -- --
-------------------------------------------------------------------------------------------------------------------------------
Total Assets ................... $ 2,271,056 -- -- $ 1,869,784 -- --
-------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-Bearing Liabilities
Savings ............................ $ 119,114 $ 663 2.21% $ 108,824 $ 610 2.22%
Money Market Checking
And Savings ...................... 402,172 3,464 3.43 296,953 2,113 2.82
Time Deposits ...................... 1,182,544 17,499 5.89 995,512 12,404 4.94
-------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits ................ 1,703,830 21,626 5.05 1,401,289 15,127 4.28
-------------------------------------------------------------------------------------------------------------------------------
Other Borrowed Money ............. 57,005 883 6.16 24,008 293 4.84
-------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .................. 1,760,835 22,509 5.09% 1,425,297 15,420 4.29%
-------------------------------------------------------------------------------------------------------------------------------
Demand Deposits ...................... 288,213 -- -- 242,395 -- --
Other Liabilities .................... 16,519 -- -- 19,303 -- --
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities .............. 2,065,567 -- -- 1,686,995 -- --
-------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity ................. 205,489 -- -- 182,789 -- --
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity ......... $ 2,271,056 -- -- $ 1,869,784 -- --
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Income .................... -- $ 24,283 -- -- $ 20,718 --
-------------------------------------------------------------------------------------------------------------------------------
Net Yield on Total Interest
Earning Assets ...................... -- -- 4.67% -- -- 4.84%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest
from taxable assets (assuming a 35% tax rate).
(2) Annualized.
(3) Yield is based on amortized cost and does not include any component
of unrealized gains or losses.

Page 17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE(2) BALANCE INTEREST RATE(2)
---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ....................... $ 498,592 $ 36,031 9.65% $ 413,350 $ 27,652 8.94%
Real Estate ...................... 824,200 60,394 9.79 622,698 44,011 9.45
Consumer ......................... 136,659 10,891 10.65 126,647 9,908 10.46
---------------------------------------------------------------------------------------------------------------------------------
Total Loans .................... 1,459,451 107,316 9.82 1,162,695 81,571 9.38
---------------------------------------------------------------------------------------------------------------------------------
Securities (3)
Taxable .......................... 499,945 23,780 6.35 432,249 19,829 6.13
Tax-Exempt ....................... 48,764 2,702 7.40 42,813 2,265 7.07
---------------------------------------------------------------------------------------------------------------------------------
Total Securities ............... 548,709 26,482 6.45 475,062 22,094 6.22
---------------------------------------------------------------------------------------------------------------------------------
Time Deposits ....................... 4,244 193 6.07 331 13 5.25
Federal Funds Sold .................. 6,340 292 6.15 21,835 787 4.82
---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets .... 2,018,744 134,283 8.89% 1,659,923 104,465 8.41%
---------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks ............... 62,742 -- -- 54,113 -- --
Premises and Equipment, Net ........... 76,654 -- -- 69,676 -- --
Other Assets .......................... 84,935 -- -- 59,375 -- --
Allowance for Loan Losses ............. (18,356) -- -- (14,168) -- --
---------------------------------------------------------------------------------------------------------------------------------
Total Assets ........................ $ 2,224,719 -- -- $ 1,828,919 -- --
---------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-Bearing Liabilities
Savings ............................. $ 120,860 $ 1,997 2.21% $ 110,039 $ 1,844 2.24%
Money Market Checking
And Savings ...................... 394,977 9,358 3.16 298,212 6,330 2.84
Time Deposits ....................... 1,164,866 49,026 5.62 968,140 35,976 4.97
---------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits .................. 1,680,703 60,381 4.80 1,376,391 44,150 4.29
---------------------------------------------------------------------------------------------------------------------------------
Other Borrowed Money ................ 39,826 1,758 5.90 14,287 494 4.62
---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .................... 1,720,529 62,139 4.82% 1,390,678 44,644 4.29%
---------------------------------------------------------------------------------------------------------------------------------
Demand Deposits ....................... 292,045 -- -- 242,412 -- --
Other Liabilities ..................... 14,986 -- -- 13,650 -- --
---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities ................... 2,027,560 -- -- 1,646,740 -- --
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity .................. 197,159 -- -- 182,179 -- --
---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity ............. $ 2,224,719 -- -- $ 1,828,919 -- --
---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income ...................... -- $ 72,144 -- -- $ 59,821 --
---------------------------------------------------------------------------------------------------------------------------------
Net Yield on Total Interest
Earning Assets ........................ -- -- 4.77% -- -- 4.82%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 18
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category. An analysis of changes
in net interest income follows (dollars in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 COMPARED TO 1999 2000 COMPARED TO 1999
---------------------------------------------------------------------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
NET --------------------- RATE/ NET --------------------- RATE/
TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans ..................... $ 9,223 $ 6,915 $ 1,852 $ 456 $ 25,745 $ 20,914 $ 3,849 $ 982
Securities
Taxable ................. 1,300 1,048 218 34 3,951 3,126 713 112
Tax-Exempt .............. 147 134 11 2 437 317 105 15
Time Deposits in Bank ..... 58 55 -- 3 180 154 2 24
Federal Funds Sold ........ (74) (85) 37 (26) (495) (558) 218 (155)
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income ... 10,654 8,067 2,118 469 29,818 23,953 4,887 978
-----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits .................. 6,499 3,216 2,700 583 16,231 9,811 5,258 1,162
Other Borrowed Money ...... 590 400 80 110 1,264 885 136 243
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense .. 7,089 3,616 2,780 693 17,495 10,696 5,394 1,405
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation of Rate/Volume . 3,565 4,451 (662) (224) 12,323 13,257 (507) (427)
Allocation of Rate/Volume .... -- 763 (987) 224 -- 1,746 (2,173) 427
-----------------------------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income $ 3,565 $ 5,214 $ (1,649) $ -- $ 12,323 $ 15,003 $ (2,680) $ --
-----------------------------------------------------------------------------------------------------------------------------------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest
from taxable assets (assuming a 35% effective federal income tax
rate for 2000 and 1999).
</TABLE>

PROVISION FOR LOAN LOSSES

The Company recorded a provision for loan losses of $2.6 million for the
three months ended September 30, 2000, compared to $1.6 million for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
the Company recorded a provision for loan losses of $7.1 million compared to
$4.4 million for the same period in 1999. The provision for loan losses
reflected an increase of $958,000 or 59.9% for the three months ended September
30, 2000 and an increase of $2.6 million or 59.5% for the nine months ended
September 30, 2000 compared to the same period in 1999 necessary to maintain the
total allowance for loan losses at an adequate level consistent with the
Company's methodology. The increase is primarily attributable to charge-offs in
excess of specific reserves by approximately $1.1 million and $2.5 million
during the three and nine months ended September 30, 2000, respectively. The
majority of the excess charge-offs over specific reserves relates to the
restructured relationship, which accounts for $569,000 and $1.6 million of the
excess for the three and nine months ended September 30, 2000, respectively.

Management charges provisions for loan losses to earnings to bring the
total allowance for loan losses to a level deemed appropriate. Management bases
its decision on many factors which include historical loan loss experience, the
volume and type of lending conducted by the Company, the amount of nonperforming
assets, regulatory policies, generally accepted accounting principles, and
general economic conditions, particularly as they relate to the Company's
lending area. See "Allowance for Loan Losses."

NONINTEREST INCOME

The Company's primary sources of Noninterest Income are service charges on
deposit accounts and other banking service related fees. Noninterest Income
totaled $5.3 million for the three months ended September 30, 2000 compared to
$4.3 million for 1999. Excluding Net Realized Gains (Losses) on Sales of
Securities Available for Sale, Noninterest Income increased $979,000 or 22.9%
from 1999. For the nine months ended September 30, 2000, Noninterest Income
totaled $15.9 million, up from $12.6 million for the same period in 1999.
Noninterest Income for the nine months ended September 30, 2000, excluding Net
Realized Gains (Losses) on Sales of Securities Available for Sale increased $3.2
million or 25.6% over the same period in 1999. The Noninterest Income growth in
the three and nine months ended September 30, 2000 compared to the same prior
period in 1999 resulted primarily from the

Page 19
<PAGE>
increased volume of business conducted by the Company and, in part, because of
the Harlingen Bancshares, Inc. acquisition in fourth quarter 1999.

Total Service Charges of $3.6 million for the three months ended September
30, 2000 increased $638,000 or 21.4% compared to $3.0 million for the same
period in 1999. Total Service Charges were $10.9 million for the nine months
ended September 30, 2000 compared to $8.7 million for the same period in 1999,
representing an increase of $2.2 million or 25.3%. The increase in Total Service
Charges is attributable to increased account transaction fees generated by 23.9%
deposit growth experienced by the Company since September 30, 1999.

Trust Service Fees of $592,000 for the three months ended September 30,
2000 increased $112,000 or 23.3% compared to $480,000 for comparable prior year
period. Trust Service Fees were $1.7 million for the nine months ended September
30, 2000 compared to $1.5 million for the same period in 1999. The increase in
Trust Service Fees is attributable to an increase in the number of trust
accounts managed, as well as an increase in fees effective April 1, 2000. The
fair market value of assets managed at September 30, 2000 was $385.5 million
compared to $374.7 million at the end of the second quarter and $345.5 million a
year ago. Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.

There were no Net Realized Gains (Losses) on Sales of Securities Available
for Sale for the three months ended September 30, 2000 compared to $2,000 net
gains for 1999. In addition, there were no Net Realized Gains (Losses) on Sales
of Securities Available for Sale for the nine months ended September 30, 2000
compared to $1,000 net gains for the same period in 1999. Market opportunities
to realize bond profits were limited as bond prices generally fell during the
nine months ended September 30, 1999 and 2000. Net unrealized holding losses on
securities available for sale totaled $17.5 million at September 30, 2000. (see
"Shareholders' Equity").

Data Processing Service Fees of $659,000 for the three months ended
September 30, 2000 increased $119,000 or 22.0% compared to $540,000 for the same
period last year. During the nine months ended September 30, 2000, data
processing fees increased $377,000 or 24.3% to $1.9 million compared to $1.6
million during the same period in 1999. This increase arose from the acquisition
of one additional data processing client during second quarter 1999 and one
during second quarter 2000. Furthermore, increased utilization of services was
provided to existing clients. The number of data processing clients as of
September 30, 2000 and 1999 was 8 and 7, respectively.

Other Operating Income of $385,000 for the three months ended September
30, 2000 increased $110,000 or 40.0% compared to $275,000 for the same 1999
period. During the nine months ended September 30, 2000, Other Operating Income
increased $460,000 or 49.0% to $1.4 million compared to $939,000 during the same
period in 1999. The increase in Other Operating Income during the nine months
ended September 30, 2000 was primarily attributable to a $167,000 gain on the
sale of land during second quarter 2000. In addition, income from the Rabbi
Trust increased by $107,000 during the nine months ending September 30, 2000
compared to the same period in 1999. The Rabbi Trust was set up to provide
funding for the Deferred Compensation Plan for the benefit of Glen E. Roney,
Chief Executive Officer of the Company. In addition, Check Order Charges
increased by $57,000 and $159,000 for the three and nine months ending September
30, 2000, respectively, compared to the same 1999 periods. The increase in Check
Order Charges resulted from an increase in the volume of deposit accounts, as
well as $25,000 quarterly incentive rebates received from the check printing
company beginning first quarter 2000.

NONINTEREST EXPENSE

Noninterest Expense of $13.3 million for the three months ended September
30, 2000 increased $2.7 million or 25.2% compared to $10.6 million for 1999. For
the nine months ended September 30, 2000, noninterest expense totaled $40.2
million, an increase of $8.1 million or 25.1%, from $32.1 million for the same
period in 1999. The efficiency ratio of expense to total revenue was 45.15% for
the three months ended September 30, 2000 compared to 42.26% for the same period
in 1999. For the nine months ended September 30, 2000, the efficiency ratio was
45.09%, up from 43.92% for 1999. The efficiency ratio is defined as Noninterest
Expense (excluding other real estate income and expense) divided by the total of
taxable-equivalent Net Interest Income and Noninterest Income (excluding any
gains and losses on sale of securities). The increase results primarily from
higher personnel costs due to an increase in the number of employees since 1999.

Page 20
<PAGE>
Salaries and Employee Benefits, the largest category of Noninterest
Expense, of $6.6 million for the three months ended September 30, 2000 increased
$1.2 million or 21.3% compared to the same period last year of $5.4 million.
Salary and Employee Benefits for the nine months ended September 30, 2000 was
$19.4 million, an increase of $3.4 million or 21.6% from the same period in
1999. The increase in 2000 over 1999 reflects increases in base salaries and
higher levels of staff, including the staff acquired as a result of the
Harlingen Bancshares, Inc. acquisition. The number of full-time equivalent
employees of 918 at September 30, 2000 increased 23.1% from 746 at September 30,
1999. For the three months ended September 30, 2000 and 1999, Salaries and
Employee Benefits averaged 1.15% of average assets. Salaries and Employee
Benefits averaged 1.16% of assets for the nine months ended September 30, 2000
compared to 1.17% for the same period in 1999.

Net Occupancy Expense of $1.0 million for the three months ended September
30, 2000 increased $169,000 or 19.9% compared to $848,000 for 1999. For the nine
months ended September 30, 2000, Net Occupancy Expense increased $177,000 or
6.2% from the same period a year ago to $3.0 million. Although occupancy
expenses increased primarily with the acquisition of Harlingen Bancshares, Inc.
during fourth quarter 1999, the increase was offset by increased rental income
generated from the corporate headquarters building in McAllen, Texas.

Equipment Expense of $1.6 million for the three months ended September 30,
2000 increased $281,000 or 21.0% compared to $1.3 million for 1999. During the
nine months ended September 30, 2000, Equipment Expense totaled $4.6 million, an
increase of $807,000 or 21.3% over the same period in 1999. Depreciation and
other equipment expenses associated with a 10.6% increase in premises and
equipment since 1999, partly attributable to the Harlingen Bancshares, Inc.
acquisition, contributed to the increase in Equipment Expense for the three and
nine months ended September 30, 2000.

Other Real Estate (Income) Expense, Net, includes rent income from
foreclosed properties, gain or loss on sale of other real estate properties and
direct expenses of foreclosed real estate including property taxes, maintenance
costs and write-downs. Write-downs of other real estate are required if the fair
value of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate (Income) Expense, Net of $9,000 income for the
three months ended September 30, 2000 decreased $92,000 or 110.8% compared to
$83,000 expense for the three months ended September 30, 1999. The net decrease
is mainly attributable to an increase in rental income by $89,000 during third
quarter 2000 compared to the same period in 1999, largely due to $67,000 of back
revenue collected on a foreclosed property. Other Real Estate Expense, Net
increased $194,000 or 69.5% to $473,000 expense for the nine months ended
September 30, 2000 compared to the same period in 1999. During the nine months
ended September 30, 2000, the net increase resulting from a $410,000 write-down
on a foreclosed property. This was partially offset by an increase in rental
income by $146,000 and a decrease in other real estate expenses by $103,000. The
decrease in other real estate expenses is attributable to the sale of a large
foreclosed property in March 1999 with other real estate expenses totaling
$183,000 during first quarter 1999. Management is actively seeking buyers for
all Other Real Estate.

Amortization of Goodwill and Identifiable Intangibles of $1.1 million for
the three months ended September 30, 2000 increased $428,000 or 62.9% compared
to $680,000 for the same period in 1999. For the nine months ended September 30,
2000, Amortization of Goodwill and Identifiable Intangibles totaled $3.4
million, an increase of $1.3 million or 64.8% from the same period in 1999. The
increase in Amortization of Goodwill and Identifiable Intangibles during the
three and nine months ended September 30, 2000 was due to the amortization of
$21.0 million of goodwill and other intangibles added during fourth quarter 1999
with the Harlingen Bancshares, Inc. acquisition.

Page 21
<PAGE>
A detailed summary of Noninterest Expense follows (dollars in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Salaries and Wages .................................. $ 5,420 $ 4,315 $ 15,673 $ 12,679
Employee Benefits ................................... 1,171 1,118 3,726 3,272
------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits ............. 6,591 5,433 19,399 15,951
------------------------------------------------------------------------------------------------------------
Net Occupancy Expense ............................... 1,017 848 3,018 2,841
------------------------------------------------------------------------------------------------------------
Equipment Expense ................................... 1,618 1,337 4,595 3,788
------------------------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
Rent Income ...................................... (220) (131) (461) (315)
(Gain) Loss on Sale .............................. (38) 20 (115) (152)
Expenses ......................................... 249 194 627 730
Write-Downs ...................................... -- -- 422 16
------------------------------------------------------------------------------------------------------------
Total Other Real Estate (Income) Expense, Net .. (9) 83 473 279
------------------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable Intangibles 1,108 680 3,361 2,039
------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations ................. 407 307 1,376 857
Data Processing and Check Clearing ............... 425 295 1,340 991
Director Fees .................................... 90 95 249 276
Franchise Tax .................................... (386) 12 (480) 237
Insurance ........................................ 96 103 284 271
FDIC Insurance ................................... 113 46 306 138
Legal ............................................ 368 111 706 413
Professional Fees ................................ 437 371 1,065 860
Postage, Delivery and Freight .................... 236 217 778 674
Printing, Stationery and Supplies ................ 414 326 1,327 1,041
Telephone ........................................ 182 140 554 413
Other Losses ..................................... 256 (59) 606 110
Miscellaneous Expense ............................ 369 303 1,199 927
------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense ................ 3,007 2,267 9,310 7,208
------------------------------------------------------------------------------------------------------------
Total Noninterest Expense ........................... $ 13,332 $ 10,648 $ 40,156 $ 32,106
------------------------------------------------------------------------------------------------------------
</TABLE>

Franchise Tax for the three months ended September 30, 2000 of $(386,000)
decreased by $398,000 compared to $12,000 during the same period in 1999. For
the nine months ended September 30, 2000, Franchise Tax decreased by $717,000 or
302.5% to $(480,000) compared to the same period in 1999. The decrease was
attributable to $462,000 and $802,000 in franchise tax refunds received during
the three and nine months ended September 30, 2000, respectively.

Legal Expenses for the three months ended September 30, 2000 increased by
$257,000 or 231.5% to $368,000 compared to $111,000 during third quarter 1999.
The increase related to legal fees incurred as a result of a higher level of
nonperforming assets compared to the same period in 1999. For the nine months
ended September 30, 2000, Legal Expenses totaled $706,000, increasing by
$293,000 or 70.9% compared to the nine months ended September 30, 1999.

INCOME TAX EXPENSE

The Company recorded income tax expense of $4.3 million for the three
months ended September 30, 2000 compared to $4.4 million for the three months
ended September 30, 1999. Although pretax income increased during third quarter
2000 compared to the same period in 1999, a state income tax refund totaling
$485,000 was recorded during third quarter 2000 resulting in a decrease in
income tax expense. For the nine months ended September 30, 2000, the provision
for income taxes was $13.7 million, an increase of $1.4 million or 11.7% from
$12.3 million provided for the same period in 1999. The increase in income tax
expense during the nine months ended September 30, 2000 is primarily due to an
increased level of pretax income.

Page 22
<PAGE>
CAPITAL AND LIQUIDITY

Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On September 30,
2000, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 12.26%, a Tier I risk-based capital ratio of 11.11%,
and a leverage ratio of 8.05%.

Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew and acquire additional deposit
liabilities is a major source of liquidity. The Company's principal sources of
funds are primarily within the local markets of the Bank and consist of
deposits, interest and principal payments on loans and securities, sales of
loans and securities and borrowings.

Cash and assets which are readily marketable, or which can be pledged, or
which will mature in the near future provide asset liquidity. These include
cash, federal funds sold, time deposits, U.S. Treasury, U.S. Government Agency
and mortgage-backed securities. At September 30, 2000, the Company's liquidity
ratio, defined as cash, U.S. Treasury, U.S. Government Agency, mortgage-backed
securities, time deposits and federal funds sold as a percentage of deposits,
was 29.8% compared to 30.3% at December 31, 1999.

Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the Company's trade area. The Company does not have nor does it
solicit brokered deposits. Federal funds purchased and short-term borrowings are
additional sources of liquidity. These sources of liquidity are short-term in
nature, and are used, as necessary, to fund asset growth and meet short-term
liquidity needs.

During the nine months ended September 30, 2000, funds for $81.7 million
of securities purchases and $150.2 million of net loan growth came from various
sources, including a net increase in deposits of $178.8 million, and $21.2
million in proceeds from maturing securities and $25.8 million of net income.

The Company is dependent on dividend and interest income from the Bank and
the sale of stock for its liquidity. Applicable Federal Reserve Board
regulations provide that bank holding companies are permitted by regulatory
authorities to pay cash dividends on their common or preferred stock if
consolidated earnings and consolidated capital are within regulatory guidelines.

EFFECTS OF INFLATION

Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring the spread between interest costs
and interest income yields through adjustments of maturities and interest rates
of assets and liabilities. In addition, inflation tends to increase demand for
loans from financial institutions as industrial companies attempt to maintain a
constant level of goods in inventory and assets. As consumers of goods and
services, financial institutions are affected by inflation as prices increase,
causing an increase in costs of salaries, employee benefits, occupancy expense
and similar items.

NEGATIVE IMPACT OF LITIGATION POSSIBLE

From time to time the Company is a party to legal proceedings including
matters involving commercial banking issues and other proceedings arising in the
ordinary course of business. Although not currently anticipated by management,
the Company's results could be materially impacted by legal and settlement
expenses related to such lawsuits.

Page 23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate loans are funded with
floating-rate deposits, the spread between loan and deposit rates will decline
or turn negative if rates increase. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company's interest rate risk
arises from transactions entered into for purposes other than trading. The
Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.

Interest rate risk is managed within the funds management policy of the
Company. The principal objectives of the funds management policy is to avoid
fluctuating net interest margins and to maintain consistent growth of net
interest income through periods of changing interest rates. The Board of
Directors oversees implementation of strategies to control interest rate risk.
The Company may take steps to alter its net sensitivity position by offering
deposit and/or loan structures that tend to counter the natural rate risk
profile of the Company. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. Because of the volatility of market rates and uncertainties,
there can be no assurance of the effectiveness of management programs to achieve
a targeted moderation of risk.

In order to measure earnings and fair value sensitivity to changing rates,
the Company utilizes three different measurement tools including static gap
analysis, simulation earnings, and market value sensitivity (fair value at
risk). The primary analytical tool used by the Company to quantify interest rate
risk is a simulation model to project changes in net interest income that result
from forecast changes in interest rates. This analysis estimates a percentage of
change in net interest income from the stable rate scenario under scenarios of
rising and falling market interest rates over a twelve month time horizon. The
prime rate serves as a "driver" and is made to rise (or fall) evenly in 100
basis point increments over the 12-month forecast interval. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. The following table summarizes the simulated change in net interest
income over a 12-month period as of September 30, 2000 and December 31, 1999
(dollars in thousands):

Increase (Decrease) in
Net Interest Income
Changes in Interest Estimated Net ----------------------
Rates (Basis Points) Interest Income Amount Percent
-------------------------------------------------------------------
s (Unaudited)
September 30, 2000
+100 ............... $ 94,451 $ 1,537 1.7%
- 92,914 -- --
-100 ............... 90,613 (2,301) (2.5)
December 31, 1999
+100 ............... 99,136 1,189 1.2
- 97,947 -- --
-100 ............... 95,954 (1,993) (2.0)
-------------------------------------------------------------------

All the measurements of risk described above are made based upon the
Company's business mix and interest rate exposures at the particular point in
time. An immediate 100 basis point decline in interest rates is a hypothetical
rate scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market developments. Because of
uncertainties as to the extent of customer behavior, refinance activity,
absolute and relative loan and deposit pricing levels, competitor pricing and
market behavior, product volumes and mix, and other unexpected changes in
economic events impacting movements and volatility in market rates, there can be
no assurance that simulation results are reliable indicators of net interest
income under such conditions.

Page 24
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company faces ordinary routine litigation arising in the normal course
of business. In the opinion of management, liabilities (if any) arising from
such claims will not have a material adverse effect upon the business, results
of operations or financial condition of the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Quarterly Report
on Form 10-Q:

(1) Exhibits - The following exhibits are filed as a part of this
Quarterly Report on Form 10-Q:

10.23 3rd Amendment to the Harlingen National Bank 401(k)
Plan
27 Financial Data Schedule

(b) Reports of Form 8-K

No report on Form 8-K was filed by Texas Regional Bancshares, Inc.
during the three months ended September 30, 2000.

Page 25
<PAGE>
SIGNATURES

Pursuant the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TEXAS REGIONAL BANCSHARES, INC.
(Registrant)

October 31, 2000 /s/ G. E. RONEY
-------------------- -------------------------------
Glen E. Roney
Chairman of the Board, President
& Chief Executive Officer

October 31, 2000 /s/ R. T. PIGOTT, JR.
-------------------- -----------------------------
R. T. Pigott, Jr.
Executive Vice President
& Chief Financial Officer

Page 26